COVID-19 Relief Bill Legislative Update

COVID-19 Relief Bill Increases Investment Efficiency of New Life

Insurance Contracts

The recently passed Consolidated Appropriations Act, 2021 permits the development of new life insurance contracts that may provide greater investment efficiencies than current contracts. These new contracts may be of value to our current and prospective clients.  

Background

To qualify as life insurance contracts for tax purposes, permanent life insurance policies must meet several requirements under Internal Revenue Code Section 7702. These requirements include the use of two interest rate assumptions for determining premium amount. The interest rate assumptions were set at 4% and 6% when Section 7702 was enacted in 1984.

In that year, the average long-term Treasury rate was around 12%. At the start of 2021, 10-year U.S. Treasury note rates are about 1%. Without an adjustment in the Section 7702 interest rates to reflect current economic conditions, Congress was concerned that consumer access to financial security via permanent life insurance policies could decrease significantly.

Consolidated Appropriations Act, 2021

As part of the act, Section 7702 was updated to reflect the current interest rate environment and to ensure that rates will continue to reflect economic conditions. The legislation establishes the current rates of 4% and 6% as maximum rates and uses floating rates for determining the statutory interest rate assumptions. For 2021, the act prescribes a rate of 2% to replace the 4% rate and 4% to replace the 6% rate. The amendment is effective for insurance contracts issued after December 31, 2020.

Impact of Lower Interest Rates

The provision of lower interest rates means that, for a given death benefit, the maximum premium that can be paid (the “7 pay premium” for COLI policies or net single premium for BOLI policies) will be greater, lowering insurance charges for any given investment in a life insurance policy and providing for greater cash value accumulation. This increases the investment efficiency of life insurance policies and their long-term return.

Life Insurance Carriers’ Response

Carriers are currently assessing how they will respond to this provision. It will be necessary for them to update their illustration and administration systems as well as modify their current products to take advantage of the changes made by the act. It may also be necessary for the carriers to refile their products with state insurance commissioners. It is uncertain how long the process to develop new products will take.

Enza’s Response

Enza Financial will be in constant contact with our carriers to track their progress and monitor the regulatory agencies to assess as soon as possible whether the new products can benefit our clients. We will update you with important developments. If you have questions, please do not hesitate to contact us at 216-236-0700.